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Operator
Good morning and welcome to the Beazer Homes first quarter fiscal 2005 earnings conference call. All participants will be in a listen only mode until the question and answer question. To ask a question, press star 1. Today's call is being recorded and will be hosted by Ian McCarthy, the Company's Chief Executive Officer. Before he beings, Leslie Kratcoski, Vice President of Investor Relations will give the instructions on accessing the company's slide presentation over the Internet and will make comments regarding forward-looking information. Ms. Kratcoski.
Leslie Kratcoski - VP of Investor Relations
Thank you Corey (ph) Good morning and welcome to the Beazer Homes conference call on our results for the quarter ended December 31, 2004. During this call we will web cast the synchronized slide presentation. To access the slide presentation, go to the investor home page of Beazer.com and click on web cast link in the center of the screen. From this site, you may submit questions electronically.
Before we begin, you should be aware that during this call, we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act Of 1995. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially. Such risks and certain even other factors include, but are not limited to changes in general economic condition, fluctuations in interest rates, increases in raw material and labor costs, competition levels, potential liability resulting from construction defects, product liabilities, and warranty claims, the possibility that the company's improvement plan for the Midwest will not achieve desired results and other factors described in our recent SEC filings including Forms S3A filed on August 17, 2004 and our annual report on Form 10-K for the year ended September 30, 2004. Please see these for further details.
Ian McCarthy, our President and Chief Executive Officer and Jim O'Leary, our Executive Vice President and Chief Financial Officer will give a brief presentation, after which they will address any questions you may have. I would like now to return the call over to Ian McCarthy.
Ian McCarthy - CEO
Thank you, Leslie. Today, we are pleased to announce record financial results for our third quarter fiscal 2005. Revenues of $912 million were up 13% and new orders were up 7%, both indicating continued strength and favorable conditions in the housing industry and our strong position within the market. Our December quarter net income was $70 million and the earnings per share of $4.70, both represent December quarterly records, increasing 48% and 38% respectively.
The significant improvement in profits can also be seen in our homebuilding gross margin and operating income margin, which increased 340 and 290 basis points respectively. These record results were achieved despite extremely difficult conditions in the Midwest and Charlotte markets.
In the December quarter, new orders totaled 3,745 homes, representing an increase of 7% year-over-year. The increase in new home orders for the first quarter resulted from increases in the Southeast, Central, and Mid-Atlantic regions. Order growth in the Southeast of 14% was driven by increases in Florida, Georgia, Tennessee and parts of the Carolina offset by weakness in our Charlotte market.
West region order growth was down 9% with lower orders in northern California and Nevada due to reduced community counts year-over-year offsetting healthy increases in Arizona, Southern California, and Colorado. We achieved substantial growth in the Mid-Atlantic and Central regions, up 60% and 28%respectively with positive contributions from all markets in those regions.
Midwest orders were down 8% with declines in most markets. Performance in the Midwest and Charlotte markets continues to be disappointing. Soft economic conditions in these market and a high-degree of competition, especially at entry level price points continue to adversely impact results. We continue to work on our improvement plan for these markets in the face of very difficult market conditions.
Our backlog now stands at 8,427 homes with a sales value of approximately $2.35 billion, up 18% and 42% respectively from a year ago and representing first quarter records. Our average price in backlog now stands at $279,000, up 20% from the prior year. This results from a strong pricing environment combined with strong closings in markets with higher average sales prices and our continued efforts in widening our price points. We believe the sizable year-end backlog provides the basis for continued strong performance as me move forward in fiscal 2005.
Now, I would like to turn this over to Jim O'Leary to address in more detail our financial results. Jim.
Jim O'Leary - EVP and CFO
Thanks Ian. For the quarter ended December 31, 2004, revenues totaled almost 912 million, a first quarter record and a 13% increase over last year's December quarter. On a last 12-month basis, this revenue level achieved in the December quarter yielded calendar year 2004 revenues in excess of 4 billion. This revenue increase was achieved despite a slight decrease in unit closings year-over-year, as our average sales price increased to $252,600 a 15% increase year-over-year and a result of improved mix and measured price increases.
In the Southeast, home closing increases in Georgia and Tennessee were offset by lower closings in parts of Florida and the Carolinas due to lingering production delays from last quarter's hurricane activity and as Ian already has mentioned, general weakness in the Charlotte market. Closings in the West were also down slightly with increases in Southern California and Colorado offset by lower closings, particularly in northern California, again due to reduced community count as a delayed community opening caused some closings to fall later this year.
This, as with the lingering impact of the hurricane, should be viewed purely as a timing issue as we expect to make up these closings in the next few quarters. Decreases in the Central region, namely Texas reflect prior quarter's order and general market weakness, while closings increased in the Mid-Atlantic by 16%, as we continued to work on bringing production and backlog in line with one another.
Closings in the Midwest were flat; evidence of the continued weakness we are experiencing in those markets as well and to a significantly lesser extent the impact of some severe weather during the quarter. The principle issue again continues to be weak market condition in those local economies, so that are yet to show a sustained improvement. Notably Ohio and Indiana. This is the case in the entry-level segment, which has also been impacted by severe competitive conditions.
As we have seen in prior quarters, revenues are increasing at a greater rates and units as we benefit from improved pricing power in most of the major markets and improved mix demonstrated by strong closings in market and higher average sales prices and the execution of a price point diversification strategies.
Our continued revenue growth this quarter reflects two key components of this strategy, geographic diversification and price point diversification. Ensuring that we are not overly dependent on any single geography or product segment.
During the first quarter, we increased home sales gross margin, total gross margin, and total operating margin by 340, 320 and 290 basis points respectively. We continue to benefit from a strong pricing environment. Through execution of our price, profit improvement, and national accounts imitative, and benefits from scales, we leveraged our overhead infrastructure through organic revenue growth.
These results include a $10 million charge for warranty cost associated with construction defect claims from water intrusion at Trinity Homes, which are included in the cost of sales and which compare to 6.9 million in the same period a year ago. These costs are primarily associated with homes including the previously disclosed class action suit against Trinity, which I will discuss a little bit more momentarily. Net income for the quarter approached $70 million, a 48% increase over last year.
Diluted EPS for the quarter totaled $4.70, up 38% over the prior year. Both figures are records for December quarter. Diluted EPS reflects the inclusion in the diluted share count of approximately 1.17 million shares issuable on conversion of our convertible ten-year notes in accordance with the EITF statement recently issued by the FASB, which became effective for us in the December quarter. The impact of this was to reduce diluted EPS for the quarter of this year by $0.30. Since our convertible senior notes were not outstanding at 12/31/03, the adoption of EITF had no impact for diluted EPS in the December quarter of last year.
Our land position as of December 3first totaled 97,862 lots, representing a 6-year supply based on the last 12 months closings. Forty-six percent of the lots were owned and 54% were under option. Consistent with the last several quarters and in line with our long-term strategy of maintaining a prudent balance between owned and option lots.
Beazer Homes' financial position remained strong during the first quarter. Our cash position was 91.1 million as of December 3first and net debt to total capitalization stood at 44%, slightly better than a year ago and in line with our long-term objectives. We achieved record earnings and improved margins this quarter and we also realize an improvement and average return on equity of the 12-month ended 22% representing a 250 basis point improvement over the same time last year.
Last quarter, we reported the court had approved the settlement agreement between the parties and the class action against Trinity Homes on October 20, 2004. No appeal to court's order approving the settlement has been received by the court within the timeframe established. We have now sent out claims notices to class members. We have until February15th to file claims. As we have received claims pursuing to the settlement, we will accrue estimated cost to resolve these claims as we have been in prior quarters. We expect to know substantially all the number of clients that we filed pursuing to the settlement some time during the 2nd quarter, towards the end of the 2nd quarter of fiscal 2005. Now, I will turn it back Ian to provide our outlook and conclude our prepared remarks. Ian
Ian McCarthy - CEO
Thanks Jim. The basic fundamentals of the housing industry remains strong, strong demographic sense combined with constraints on land and housing supply, will continue to provide excellent opportunities for large public home builders such as Beazer Homes. We will continue to capitalize on these opportunities through the execution of strategic initiatives that one, increase profitability by utilizing our size, scale, and capabilities as evidenced by a 290 basis point increase in operating margin this quarter.
Two, increase market penetration through focused product expansion and price point diversification as evidenced by an increase in our average sales price and backlog to $279,000. And three, leverage our national brand, which is built around the customer. Each and every day, we are focused on ensuring that our brand promise to provide an enjoyable customer experience plus value is reflected in everything our customers experience. With the customer-centric focus, we have the opportunity not only to sell homes, but to gain lifetime Beazer Homes advocates through repeat purchases and referrals.
Our focus on these strategic initiatives combined with record backlog and the expectations of continued strength in the housing market provide us confidence in future growth opportunities. Today, we reiterate our EPS outlook for fiscal 2005 of $20 to 21 per share, absent any unanticipated adverse changes. Our outlook contemplates continued strength in our core markets and the absence of further deterioration in the results and prospects of the Midwest and Charlotte markets.
Performance in these markets continues to be challenging due to ongoing economic weakness exacerbated by severe competition at the entry-level price points. In conclusion, we continued our strong track record of performance and achieve record first quarter revenue, net income, and earnings per share, reflecting our commitment to improved profitability and focus growth.
As we continue in fiscal 2005, our strong backlog of $2.3 billion, up 42% coupled with expectations of continued strength in the housing market and excellent opportunities for large public builders provided confidence in our future growth prospects. We intend to capitalize on these opportunities by executing on our focus strategic initiatives to achieve a long-term growth potential. Jim and I would be glad to answer your questions and I ask the operator to give instructions for registering your questions.
Operator
[Operator Instructions]. Our first question comes from Ivy Zelman of Credit Suisse First Boston. Ms. Zelman, you may ask your question.
Ivy Zelman - Analyst
Good morning every body. Good quarter.
Ian McCarthy - CEO
Thanks very much.
Ivy Zelman - Analyst
Can you help us gain a little bit on your guidance for 2005 and break it down a little bit with respect to what you are anticipating with respect to margins and units and of course pricing.
Ian McCarthy - CEO
Sure. I will cover that idea. If you are back a quarter, we talked about 10% unit improvement and flattest price and improvement in margin. And obviously we beat the quarter not the way we expected, we beat it by about $0.30 relative to consensus, which was in line with our guidance, but we did on the lower unit count, lower community count, and better pricing, actually than we anticipated. Now, part of that is the market and part of that is mix. If you would ask me what I prefer to see, our average sales price a bit closer to 240, but a much healthier contribution for the Midwest. Absolutely. We still expect that to be the case.
We do think, you know, a year, we haven't raised guidance and we certainly have a little bit of room to beat it now, certainly with the $0.30 we have talked about today, but we still expect roughly 10% unit contribution and a much lower average sales price as reflected on our backlog by the time of the year finishes out and continued improvement in margins. Actually we did a little bit better as far as the rate of growth and margins this quarter than we anticipated, particularly in the home building side. We would expect that to continue, maybe not at the same pace. I mean to be honest, we are having a lot more success in some of these initiatives than we expected. That's a part of the improvement.
You know, certainly I would say the biggest issue is mix and price. If the Midwest were contributing what we expected, that would be lower and you would see lower margins as well, but the unit count obviously would be higher. So, still in line with our original guidance, margins could be bit better than we forecasted. I would like to see our average sales price come down closer to what we anticipated, but that obviously reflects a much bigger pro rata contribution from some of our big units, but lower margin places like the Midwest, like Charlotte, may be the central region, which is Dallas and Houston come up a little bit as well.
Ivy Zelman - Analyst
What would you be comfortable with us modeling property margins for the fiscal 2005.
Ian McCarthy - CEO
I think what you have here approximately 50 basis points.
Ivy Zelman - Analyst
With respect to looking at your land supply, you obviously, at the 97,000 lots or almost 98,000, where are you buying lots today or optioning lots predominantly where is that capital being allocated geographically?
Jim O'Leary - EVP and CFO
It's pretty much across-the-board. We have got a very good range of land positions coming through. Obviously we are still investing in the West where we see still very good long-term demographics there in California and our market in Phoenix, which is strong at this time. Las Vegas, we have to repurchase in Las Vegas because we basically sold out of communities there. So, we are reinvesting in that. Most in Colorado, so we see a little upturn in Colorado now, which is very welcome.
The other very strong markets for us, where we're putting considerable dollars in, I would say, is the Mid-Atlantic where we have been investing and we are now really seeing the benefit. And then I would say down in Florida where we see a lot of constraints in those markets and we put in large dollars into the markets and some large entities there and proxies there, which will come back to us over the next few years. So, I would say those are our strongest markets at this time. Probably, less investment in the Midwest, a little less investment in the Southeast at this time.
Ivy Zelman - Analyst
Is there any market, you know MSA within Florida and or in California based on MSAs where you think land prices are a bit ahead of themselves. Therefore, you keep your powder dry and not be aggressive in particular area within the two states?
Jim O'Leary - EVP and CFO
I think it is difficult to say that we are ahead of ourselves when the market is still strong in pricing, home pricing has still some appreciation in there. So, I think that we could have thought that for a long time now that we may have been ahead of ourselves, but in fact the market continues to show strength in that, so I think at this time we feel comfortable with the pricing we are paying.
Obviously, we are watching that to make sure it doesn't get ahead itself too far with some of these markets are very constrained, but we have actually taken some positions, particularly in Florida, which are larger positions for us. They're longer term ventures for us and they are very favorable pricing. Now, we have to do some work to bring this online. We have entitlement, these are not (audio gap), but there is work to do in terms of the density and the community count and the number of different products within these larger communities with their very advantageous pricing at this time.
Again, a little bit longer term investing for us, we have been more of a retail purchaser over the last few years and now we are taking some longer positions. You can see that in the fact that our year's supply of land now is up to six years on a look back basis. So, we are up to six years, and part of that reflects the increase that we have made in some of these markets. These longer term commitments. The short answer for that is, I think the prices we are paying represents a good value for us going forward.
Ian McCarthy - CEO
If you look at the six years, I think the 10-K will be filed later, but you could actually derive it from our 10-K because the mix hasn't changed substantially. We don't have 6 years in some of the markets you would be concerned about. We are between 2 1/2 and 4 years. Let's say 3 in markets California, Vegas and the Mid-Atlantic. Places where understandably prices are have risen a lot, affordability is an issue. We tried to keep our investments there and the mix of options and owned down to a reasonable level.
The six years if you look at our backward pace, we put investments in Maryland where you got a much slower pace today, which basically quadrupled this quarter and we will see that in the future. We have put a lot of investment in Florida where affordability is still very good. Whether it's the next California or not, it's a phenomenal market with great demographics. If you look at the backward pace, we have a much higher year supply than is actually reflected by what we are going to do in the next few quarters. That will be a huge market for us in the next few years and a big mix in the Midwest where as soon as it gets back to half of where it was two years ago, that six years drops considerably. So, I think we are a lot more prudently invested than it looks.
Ivy Zelman - Analyst
With respect to Florida, realizing it's a phenomenal market right now and your decision to change strategy from being a retail buyer to a longer term commitment. Is that due to just the frenzy that we see going on with a lot of the public builders, trying to load up on land there? Do you feel like you are missing the boat if you don't make this long-term commitments?
Jim O'Leary - EVP and CFO
Oh that is not the case. I think we found opportunities there being in the markets that are advantageous for us and I think they are good investments. So, we still have the retail lots that we are building on today and going forward in Jacksonville, Orlando, and Tampa. These are big strategic investments and markets, which are very, very tightly constrained in terms of supply. So, these are investments for the next few years for us. So, we don't feel we are reacting to frenzy, we are building on lots today that we have been buying over the number of years and these we believe a strategic long-term investment in a market that is not going to become easier to build in the years to come, but the prospects, the demographics in those markets are still very, very positive.
Ivy Zelman - Analyst
No, I realize that, but what is changing, and why now? You know, you just three years ago you should have been buying land long-term commitments in those packed market sector, now it's so hot. Just curious, what has changed strategically that now you are accepting making the long-term commitment?
Jim O'Leary - EVP and CFO
I think part of it is looking at the market and the dynamics and the market and possibly the size of the company now. I think that we have the firepower to be able to go out, we have, you know many, many years of strong earnings, so we have got now go to balance sheet that we can go out over the last year or 18 months. We strengthened our balance sheet and focused on that and we believed that these are the right invest AMS to make at this time. So, I think it is probably the market and partly just the size and scope of the company now that this is the right time for us to do it.
Ivy Zelman - Analyst
I am trying to not take up the whole time, but just real quickly, cancellation rates, roughly company wide and then given the challenges in Charlotte, in the Ohio, and Indiana markets, can you tell us, maybe if those are higher than the average?
Ian McCarthy - CEO
Sure, we went down from 27% to 25% this quarter.
Ivy Zelman - Analyst
I am sorry 27% of what quarter?
Ian McCarthy - CEO
Yes 27.2% a year ago last. 25% this past quarter. Interestingly enough, it came down because of improvement in strong markets. The places where you are on either waiting lists or you have deep backlog that will be twice as big if you wanted to sell. Those markets came down a bit because we do not have cancellations. The Midwest stayed roughly flat and obviously they were above the company average. The markets like Charlotte, Houston, Midwest; who are still a little bit more dependent - obviously a lot more dependent on the entry-level buyer in those markets. They are above company average in the 30s and 40s.
Ivy Zelman - Analyst
You said the Midwest was basically flat. Is there any increases in the other markets where you are challenged a bit?
Ian McCarthy - CEO
Nothing will be notable, but if I'm wrong, I will come back to you.
Ivy Zelman - Analyst
Okay, and you know how I'm focused on financial services and ARMS and such Can you just give us the numbers related to what percent your business ARMS and IOs compared to year ago and what your LTV ratios are, some of that financial data please.
Jim O'Leary - EVP and CFO
Our LTV is 83% and we are getting the ARM number for you, I think it is in the high 30s.
Ian McCarthy - CEO
It is 39%.
Ivy Zelman - Analyst
Was that reference to year ago.
Ian McCarthy - CEO
I don't know have that figure right here--
Jim O'Leary - EVP and CFO
It was actually about 20% a year ago. It has gone up to about 39%.
Ivy Zelman - Analyst
Thanks.
Ian McCarthy - CEO
Thanks Ivy.
Operator
Todd Benzil (ph) of BB&T Capital Markets. You may ask your question.
Todd Benzil - Analyst
Hi guys, how are you?
Jim O'Leary - EVP and CFO
Fine, how are you?
Todd Benzil - Analyst
Good. I know this is going to be difficult to do, but if you could allow, I'll give a shot anyway. Can you, maybe breakout the margin improvement, which by the way was very impressive and give us an indication of how much of that you think was due to you know internal initiatives and leveraging you know a larger company versus changes in mix?
Ian McCarthy - CEO
Rather than break it out, I will give you some of the pieces, I think you need to do it. They are absolute numbers that are included in our year forecast, but I think it will help your back in to -- if you look at the average price, and you did a little bit of the numbers on what average sales price and individual markets are and when you plug this, I think you'll be able to get it relatively easy. I'll do it if I had done it myself, but I'm not sure it's that important. We this year, and if you go back about a year and a half ago when we first started talking about our, for example our national accounts initiatives, we did about $5 or $6 million of direct rebates and really didn't have preferred account or a sole provider except for one or two categories.
This year fiscal 2005, we should probably do about 20 plus million, somewhere between 19 and 21 million. This year, just direct rebate, and that really doesn't reflect our efforts in this area. We will not focus on rebate, we will focus on direct cost fall in reductions. If you go back to a year and a half ago to today, we have basically quadrupled the rebate, which is an easy number to calculate.
We are not trying to drive the rebates necessarily. In appliances and cabinets and a host of individual categories, our direct cost reductions are probably considerably greater than that improvement because in the case of appliances, we negotiated with General Electric, they ship directly to you. In the case of cabinets, for the most part, you are dealing with four or five guys, who don't go after distribution, they go directly to you and we have rebate on the back end, plus up front, direct cost reductions.The 20 plus anywhere between another 10 and 20, I think is the improvement, we have had over the last year and a half. That will be for the full year.
That also doesn't reflect you know a lot of the things you have to do to get to that , which we are seeing a lot of successes on, like anything it has got some fits and starts on plan reduction and specification reduction and minimizing specification creep. Those things could be anywhere between 50 and 100 basis points.
So, we are purely speculating and those are things I think over the long-term are going do a lot more to narrow the gap between ourselves and some of the other big builder brethren that are out there, because they not only have a one-time impact, but they have sustained impact as the company continues to grow. The rebate dollar eventually hits a point of diminishing returns without a huge increase in the average size of the company. You are going to hit an average per home rebate of somewhere between 1500 and 2000 in the next year or two and then you probably level off. We have gone from about 500 to 1100 to 1200 this year. So you know, we are seeing some improvement, but in the grand scheme of things, our price point diversification, moving up in price point is still probably more than 50% of the improvement.
Todd Benzil - Analyst
Okay.
Ian McCarthy - CEO
Okay?
Todd Benzil - Analyst
Yes, absolutely and then you try to get you to drill down on something else. With regard to the, the continued delays in the hurricanes, do you have a walking around number of how many net units you think you might have been hit by in the December quarter?
Ian McCarthy - CEO
I think the last year, the September 30, 2004 quarter we said it was about 150 to 200. That's when the hurricanes actually hit. I think that is the number that kind of continues to carry forward. Those are closings we thought, we had, we absolutely missed. Now what you see, I will give you the examples. We have a community in Tampa, just can't get the water meters. It's not a question of we are not ready to go as soon as we get them. We just need the people to come out and do it and they are all working on other issues.
Not just Beazer, every big builder has been impacted by this. If you look at shingles (ph) that runs on allocation now, particularly in Orlando. Those types of things I think are carrying the 150 to 200, you know on to next quarter or beyond. So, I think that is probably the right number. If you ask me are we worried about getting this, I'd say probably not. Those are healthy markets, strong demand for the most part in very affordable segments where anything we lost backlog, we got two or three people lined up for. So I really believe that is purely a timing issue.
Todd Benzil - Analyst
Okay. Thanks very much.
Ian McCarthy - CEO
You're welcome.
Operator
Margaret Whelan of UBS Warburg, you may ask your question.
Margaret Whelan - Analyst
Good morning, guys. Well done. Just an answer to Ivy's question, Jim, you said you thought your operating margin I guess either will up 50 basis points by the end of the year versus the quarter just reported. Is that right?
Jim O'Leary - EVP and CFO
You could see a continuation of that and again, that is going to be most impacted by mix relative to anything else.
Margaret Whelan - Analyst
Okay, your EBIT you reported was 12.4, and we should be at a run rate of 12.9. How can your estimates are far too low.
Jim O'Leary - EVP and CFO
If you think so.
Margaret Whelan - Analyst
Oh please --
Jim O'Leary - EVP and CFO
Again if mix changes a bit we are not too far, not too low.
Ian McCarthy - CEO
We are at the point, Margaret, we are expecting to see and we would certainly like to see the Midwest improve and pick these number up and it will pull the average price down. That's the key growth. We have got this distribution of this time left. Our West coast markets, our Mid-Atlantic markets are strong. They are delivering good results and they're pushing our average price up, which is good, we like that, but we want to drive the Midwest in there. We are underperforming there and we want to see that come up, so it is going to pull our average price down. I think you need to factor that in as well.
Margaret Whelan - Analyst
So, the 50 that's contingent on the Midwest?
Jim O'Leary - EVP and CFO
Coming back to some extent, that's right.
Margaret Whelan - Analyst
Okay. And then, the only other question I had was what was your breakdown at the end of the year in terms of price points that you are reaching. I know you have been focussing away from entry level. Do you have a sense of that yet?
Jim O'Leary - EVP and CFO
Oh, we have. I think if you, if you see in the annual report this year, the last two years, we have really talked clearly about how we are trying to get a strategy across markets. Every market we are in. We can't put it in dollar terms because if we compare Indiana and we compare California, those dollars are so different, but the strategy we have is to have an economy product in every price point, which is truly price sensitive, it is where the buyer is looking for a price-sensitive product and typically first time buyer. We are looking to have a value product where price is still important, but it is not the only consideration. There are some specification levels that are becoming more important.
Then we have a style product, which is really where price is not nearly as important, it is typically a much higher price, that's where features are a lot more important to the buyer. So, we want to have each of those three sectors across each of our markets and then we are adding on to that active adults in many of our markets. We have been doing it quite considerably in the Mid-Atlantic and we are really attracting those buyers in Florida and some of our West coast markets. They are not all in restricted communities, but some of them will be.
The strategy for us is to have that economy value, style product across all of our markets and that's what we are stressing and that's why you are seeing to a degree, some of our price point really come up as we start to bring the style product in and then overlaying that and varying by market will be adding active adult communities as we go forward. The active adult communities can either be in economy, value, or style. They can be any of those three. So, again it is difficult to put dollar numbers on the price points there because they vary, but the strategy is clearly defined for everyone of our markets in terms of where we want to be in each of those sectors.
Margaret Whelan - Analyst
Thank you.
Ian McCarthy and Jim O'Leary: Thanks.
Operator
John Lynch of Lynch Research. You may ask your question.
John Lynch - Analyst
Good morning.
Ian McCarthy - CEO
Hi, John.
John Lynch - Analyst
In terms of job growth, Ohio, Indiana, Charlotte, Houston, are these markets experiencing any job growth, any significant change there? Is there any expectation that if they are not yet, that they might in the near term?
Ian McCarthy - CEO
John, the job growth in those markets is certainly less than we would like it. I think there is some very minor positive job growth in those markets. Those markets are obviously trying to redefine themselves. We see long-term the potential in those markets to be good, solid markets, they are very large markets, take Indiana, take Ohio, and take Charlotte and North Carolina, all the markets we have weakness in at this time we are working to try and correct that, but I would tell you, it's not coming around as fast as we would like.
We would certainly like to see the economy pick up a bit faster. We would like to see more job growth. I think what the markets in Indiana and Ohio in particularly have to do is focus on non-manufacturing jobs. They have to attract other service-type jobs and we are going to be dependent on that happening so that -- we want to see that job growth to pick up our prospects in those markets. We are well positioned in those markets, so long-term good returns for us, but in the short-term, we are not seeing the results that we would like.
We are not seeing the pick up in the economy we would like and we are seeing some pretty intense competition in those markets, so we feel long term with changes that we are making, they are coming through in terms of product changes, organizational changes, but they are not as quick as we would like. We would certainly like to see some better job growth over this next year. We would like to see some stimulus in those markets because at the moment they are tougher than we would like.
John Lynch - Analyst
One of the problems that you and maybe other competitors have overbuilt in those markets at all. Are you running ahead of the markets in terms of the products you are putting out?
Ian McCarthy - CEO
There is a little bit of that. Basically we haven't got a lot of inventory in those markets. We are trying to control it, but there a number of nonpublic companies in those markets, which are potentially building ahead of the market and I would say that overall in those markets, there is more inventory than we would like. So, we are trying to control that in terms of what we are doing in the market, but I would say, yes at this time there probably is more inventory in those markets that we are seeing in many other markets.
John Lynch - Analyst
Thank you, Ian.
Ian McCarthy - CEO
Thanks John.
Operator
Stephen Kim of Smith Barney, you may ask your question.
Stephen Kim - Analyst
Thanks very much. Can you hear me?
Ian McCarthy - CEO
Hi, Steve.
Stephen Kim - Analyst
I got on the call late, so I apologize if you addressed this, but my question relates to your returns on capital in the Midwest. I'm not sure whether you are comfortable giving this information now, but my question is how much lower than the company average right now, ballpark figures do you think the Midwest is running. That's will be my first question.
Ian McCarthy - CEO
I'm not wildly comfortable about it, and if I'm wrong I'll come back, you know, I'm sure it's anywhere between 5% and 10% lower than the company average. If you just look at we are hitting our numbers, we are doing very well, return of capital went up. But again it is a mix issue of; we are a little bit more concentrated in the Midwest than your typical national builder. We have got more regional guys that are focused. If you look at their returns relative to taking MVR who is very centered in a region where we do as well as they do, but we don't have as much or as pure mix as they do. The same type of disparity is what you see and somewhere between 500 basis points and 10%.
Stephen Kim - Analyst
Have you taken any write-downs this quarter on the lands --
Jim O'Leary - EVP and CFO
Steve, we think the land is absolutely fine. We have not taken any write-downs and obviously as we go into the next quarter, the evaluation date for our intangibles is April 30th and something will be working on. We have done as a company all the right things as far as repositioning the product line and changing over management and changing over salespeople, really dramatically overhauling the company that was purely focused on entry level.
I'm glad you asked after Mr. Lynch's question. The entry-level has been much tougher in each one of these markets. The mix of job growth, particularly if you say, hey, employment is flat, it is actually not flat, it has been very down in the manufacturing area than up or flat in the white collar segment. We are not and have not been positioned there.
We have changed over the company dramatically in the last year and a half, but whether or not that's making a difference in the next quarter or two, I think we will have to go through the exercise and then see whether or not the near term and medium term prospects align with the long-term. I think the long-term, we are doing absolutely the right thing. If you look at, I hate to name competitors, but (inaudible) results, they weren't terrible. They are actually pretty good, but they are at a much higher price point there.
If you are selling at first time, move up, second time, move up, you are doing a lot better than some of the private and smaller public guys that Ian mentioned. (inaudible) put a little bit more in the market than you like to see and they are right now competing on price and it is impacting us and mathematically it comes back to your original question. We absolutely do have a lower return on capital this quarter for the last few quarters in the Midwest market such as Midwest bigger market like Charlotte or Lexington. Those markets as well. Okay.
Stephen Kim - Analyst
Okay, great. Appreciate that. The second question I had related to the company's brand initiatives. I know that you guys like a few other builders, I think you are probably one of the more focused on brand name establishment than some of the other builders out there. My question relates to the value of a brand in home building. Have you done any work on how much you think people may be willing to pay up for any brand in home building?
Because I think there is a sense amongst some people that brands in home buildings don't really give you any benefit because your average person would be just as happy buying a house from Joe Smith builder that he would from Beazer or Centex or a Pulte in fact, you know just by having brand name recognition, you almost create a liability for yourself, by putting a bull's-eye in your chest if anybody wants, you would (inaudible). So can you talk about any work you have done that tells you that having a brand acting as accrued benefit for somebody in the industry.
Jim O'Leary - EVP and CFO
Steve, what I am saying that is certainly the larger builders -- just to try and turn it around the backway -- the larger builders have got a bull's-eye there in terms of the litigious environment and we would certainly like to see that change. I think all of the builders, the homebuilders, the National Association of Homebuilders are all working on that to try and get some tort reforms, change the legal environment because there is a difficult litigious situation today. That's the first point.
In terms of the brand, we haven't quantified it in terms of dollars, but we spent a long period of time here, working on this, and what we are trying to do here is make sure that there is value in the brand and as I said, we haven't quantified it in terms of dollars, but the research we have done in terms of home buyers, they don't really like the process of buying a home. This is not like going to the super market and doing their shopping.
This is something - it's a big purchase for them and it's difficult for them to understand. What we are focusing our brand around, as I said earlier on, is making it a more enjoyable experience for the customer and make them understand that when they come to Beazer, we are going to take care of them, we are going to take them all the way through that process and we are not only going to do it in our very best markets, we are going to do it in every single market and that's the whole point here.
The brand is a brand facing out to the customer and it also a brand facing in to everyone of us, our subcontractors and our partners internally and say these are the standards that we expect to give to every single customer. So the brand faces both directions and it's a way, it's an umbrella for us. These strategic initiatives we have within the company in terms of profitability, in terms of market penetration, you know I talked about economy, value, and style. All of these things come under the brand internally.
The customer will then see it in terms of the service they get. I would say at the end of the day, you are going to see builders like Beazer having customers who then become advocates for them and say the experience I had with Beazer was good and I am going to refer that to my friends and family. We found that in every single case, in every customer, and we did thousands of surveys here as we were developing this. In every case, the purchase of a home was not an impulse buy. It was that the customer went back and the number one referral they made was to friends and family.
The way that we leverage our brand across all of the markets that we are in and then get that referral rate from all of those customers and all of those customers' friends and all of those customer's relatives is absolutely what we are building this brand for. This is how we are going to do it and we think it's the only scalable model. We don't think that being good in one market and being something completely different in another is a scalable model. We think this that this is something that we are working on today for the future.
We are seeing some of these strategic initiatives as I have said earlier on, you know, 290 basis point increase in operating margin in this quarter. We are seeing better penetration into the higher price point. All of this is part of our brand. I think, long-term you are going to see the companies who focus on this are certainly going to be better positioned, as these larger builders like those Beazer become larger and larger going forward.
Stephen Kim - Analyst
Thanks. I just have one quick question if I could.
It relates to your operating margin. Obviously you had a great operating margin this quarter despite obviously Midwest not withstanding, as have many other large public builders done very well in the margin point. My question is how high do you think your operating margin can theoretically go in this industry. Because here before I think most people in prior cycles thought that probably you're talking maybe a 10% operating margin is kind of a ceiling and of course you have blown right through that and people at this point think it's over-extended and it has to comeback normalized to some higher mean that is still lower than where it is today so that they sort of feel that these are unsustainable margins.
The builders seem to operate with an idea that margin can go higher comfortably and one of the reasons they give for that is that in some of the regions or larger markets they get very high margins that are higher than company averages. Where do you come down? Do you think margins right now are a little higher than normal and are set to come back at some point in the future or do you think that we are going to go onwards and upwards from here and what do you think that level would be?
Ian McCarthy - CEO
Steve, I wouldn't like to put a figure on that. What I would say as you know where we came from was focused on return on capital and we still want to do that. We did a lot of it years ago buy asset. We recognize today that because of the investment we have to make in all of these markets, we cannot get that asset turned to it. We are very focused on margins and we are below the pack still and we are coming up into the pack. I would say that our exposure to any pull back on margins shouldn't be as much as others.
We still have room to come up there. We are doing it I believe because there are real constraints in the market and you are seeing the big builders really becoming dominant in these markets and I think that is going to give us the ability to push margins, also efficiency within these markets we're becoming more and more efficient as we go forward.
Jim talked about our purchasing initiatives. They are many efficiency there, so I do think that the industry is changing , the industry now is becoming a lot more consolidated through the larger builders, particularly in some of the big markets.
We always felt we would much rather have competition from other public builders who are pushing the margins rather than the previously dominant pick-up builders and the small fragmented builders who really were working for wages rather than working for an open (ph) margin. I think you are seeing a structural change in the industry, but I think we will continue to enhance the margins, but I wouldn't like to say how far they could go. What I would say for Beazer is, I think we still have room within the industry to come up into the middle of the pack, which is what we are looking to do. We are achieving it, we are moving up there, so I think that we as a company have got room to go still. Thanks, Steve.
Stephen Kim - Analyst
Thanks.
Operator
Timothy Jones of Wasserman and Associates. You may ask your question.
Timothy Jones - Analyst
Can you hear me.
Jim O'Leary - EVP and CFO
Tim, how are you.
Timothy Jones - Analyst
I am fine. I was called out for five minutes, I'm sorry. I'm having a lot of trouble getting to your average price. Let's go over this okay for the year. Basically, you said that your first quarter average price was 152 and like 178 or something in the backlog.
Jim O'Leary - EVP and CFO
252 and 278 in backlog.
Timothy Jones - Analyst
You expect a substantial rise in the Midwest, yet in the first quarter backlogs were down around 10% and orders were down 5%. You are sitting here with the West up with 750 units in backlog, which is much higher price as opposed to the Midwest down 100. With lower subdivisions and lower orders and backlogs, how do you expect this dramatic turn around in the Midwest?
Jim O'Leary - EVP and CFO
The point we are making here Jim is that, we haven't sold to the level we would expect in the Midwest. We expected to beat our December comp in the Midwest, which was still a low number and we didn't achieve it. We are disappointed with that and we are refocused and we expect that there will be a turnaround in these numbers in the Midwest, for the number of communities that we have in the Midwest are way below out expectations, so we are just not achieving the sales that we want to achieve, but we are focused on achieving that.
What we would expect and we look internally at our budget numbers and what we expect out of each of our communities in the Midwest, the numbers should go up as we go through the spring into the summer. That's how we say we don't think that our sales rates will increase appreciably in those higher-price margins, California, Mid-Atlantic, you know, we saw 60% increase in the Mid-Atlantic sales. We don't expect to sustain that kind of increase going forward.
What we are saying is, normalize those numbers in those higher priced markets, but let's get some increased sales in the Midwest, and Charlotte and another low average price point for us. If we achieve that, and we want to achieve it; if we achieve that, then we will see our average price being pulled down, which is a positive for us because it means the Midwest and Charlotte in particular have picked up and have reached the internal goals that we are setting for ourselves.
Ian McCarthy - CEO
You hit on the principal and the toughest things we have in giving guidance and one of our toughest operational challenges, but if you go back a year and a half, two years ago, the Midwest and Charlotte between the two of them we are doing somewhere between 1500 and 2000 units higher. The issue we have is the segment we are serving has been hard hit, the local economies, particularly with respect to job growth have been challenged, but we are putting new products out in the field and we are coming up into the principal sales season.
After Super Bowl, things either happen or they don't and if you get the type of unit growth out of the community count we have in both of those places, in both of those markets by the way have substantially more communities and a higher land supply than any other market we are in. You certainly have the leverage if the economy is there and the product well received, we should do those types of numbers. We have done them before. The predecessor companies had done them before, but we won't know that until after the Super Bowl, kick off for the sales season, but we expect it to be there. We have done all the right operational things. We just need the market to be there for us.
Timothy Jones - Analyst
Do you expect a dramatic increase in the subdivisions in the next couple of quarters in the Midwest. Can you quantify it, was it at 128 versus 135 at the end of the first quarter?
Ian McCarthy - CEO
The subdivisions are there and they have been there all the way through. What we are saying is sales rate per subdivision is so low in those markets. It is way below our expectations. We believe the subdivisions in the communities are open. The new product coming on stream and we have organizationally changed many of the structures of those markets. We are positioned to drive those markets forward and we are putting a lot of effort into doing it. We have been since sometime put a lot of effort into driving the markets forward. To date it hasn't happened and we are disappointed with that.
As Jim said, we are very focused on making the sales as we go through the spring, as we get into the summer and that's what we are focused on and that is why we would like to see that average price come down. It reflects the fact that the Midwest and Charlotte in particular has came back to where we would like to see it. If it doesn't come through, then more than likely our average price will stay up somewhat, but we will be very disappointed in the operations that we are focused on now to make those sales, Midwest and Charlotte in particular.
Timothy Jones - Analyst
A couple of builders are saying that Charlotte is turning around. Not the Midwest, but Charlotte and the Carolinas. You are not experiencing that?
Ian McCarthy - CEO
We haven't seen that yet. We have been in those markets since the 1970's and the company has been there since that time and this is the toughest we have seen it. In fact, there are more people coming into those markets. It's unbelievable that more builders are still coming into the Charlotte market in terms of very difficult conditions there. We are very focused and we have been very focused there on the entry price point. We would like to expand that somewhat. It just takes time to do that. We are seeing others coming in, so we actually see competition increasing there as we go forward, but we have got communities there. We have expectations of getting those sales up. That's what we very focused on for the next few months.
Timothy Jones - Analyst
The market itself basically turning around somewhat, but there is still more builders therefore it is static?
Ian McCarthy - CEO
I honestly don't think the market is really turning around. I think it's very flat at best and more competition in those markets. I think it's tough. We recognize it's tough, but we are going to put our best face on there and make the best return we possibly can in that market.
Timothy Jones - Analyst
Good answer. Thank you.
Ian McCarthy - CEO
Thanks Tim.
Operator
David Knott of Knott Partners, you may ask your question.
David Knott - Analyst
Hi.
Ian McCarthy - CEO
Hi David.
David Knott - Analyst
Your SG&A depending on how you calculate went up 42 or 46 dips year over year in the quarter. Why would it have gone up if last year you were in the branding mode and you were spending whatever it was $3 or $4 million a quarter as I understand it.
Ian McCarthy - CEO
In lot of ways, I think the percentage is less relevant, but I will come back to that in a minute. In absolute terms, it went up by about 14 million. We have added people, we have been spending money, not just on the one-time branding cost, but on brand development in every market. We have got a number of training initiatives under way around the branding and around a lot of the other things we are doing, and that is typically unit count driven.
This quarter, had you had a few of the closings that we think are purely timing, northern California for example and high gross margin and high-revenue place, if you have had the type of unit count, which we are prepared to do and are staffed up adequately to do in a couple of markets that Ian just ticked off, particularly the Midwest, you would absolutely see a pretty material decline in those numbers, but the absolute increase at 40 million, our initiatives have been put in place to prepare ourselves for growth and you know while there are variable costs if you know you are going into a market slow-down, but what we are talking about here are timing issues.
When you get back the closings in the west, we just talked about a 150 to 200, it is probably more closings in Florida where you go back to the question that Ivy had asked before. We have put a lot of investment including in people and resources to position ourselves for growth in Florida. You typically see the overheads come before that. That's the absolute dollar increase David, and if you just had, my guess is that if you had the 200 plus 150 to 200 in Northern Colorado, we did not get. You see that drop right down probably below the number you picked up earlier where we were at the end of last year. David? I put him to sleep. David, are you there? Should we move on to the next question?
Operator
We will move on to the next question. He did disconnect.
Ian McCarthy - CEO
Okay.
Operator
Michael Kennedy (ph), you may ask your question.
Michael Kennedy - Analyst
Some financial -- couple of quick follow-up. One is on the owned and options mix, given that you are looking at longer land positions in some of markets, specially see that maneuver from next couple of years?
Ian McCarthy - CEO
Mike, we always kept it what we say as around 50% 5 point on either side of that. Some of these longer land positions, we can actually option as well. So some of those, we are taking an option on and we would like to keep it in this balance. We have been slightly heavier on the options 54% currently; we have been like that for sometime now. I don't think today it is going to change substantially. We will obviously keep you up informed if we do see a change in that, but today we still think within that range, either side, 5% plus or minus 50% is where we feel comfortable today.
Michael Kennedy - Analyst
The other thing is in terms of active adult, what percent of your mix is that right now roughly?
Ian McCarthy - CEO
It is a very small mix at this time, less than 5% I would say. We haven't done a lot of active adult in restrictive communities. We have done it in New Jersey, we have done in Maryland, and we are just about to enter it into Virginia, but we have targeted a lot of active adult in terms of profile and in terms of product that we are putting out there within our existing communities. We are doing a lot of that.
So when I say active adult, it doesn't mean it's necessarily in restrictive communities. We will be doing some of those, but we will also be targeting those buyers in many of our communities and not just in the traditional Phoenix and Florida markets. There are many people now who want to retire in place and that's the market we have been tapping into successfully in the Mid-Atlantic. We will be just targeting that buyer in the profile and the graphics we look at in terms of positioning our productions and our pricing. We do expect them to go up over time and I certainly will keep you informed how we are progressing on that.
Michael Kennedy - Analyst
Okay, great. Thank you.
Ian McCarthy - CEO
Thanks Mike.
Operator
Michael Rehaut (ph), you may ask your question.
Michael Rehaut - Analyst
Hi, Good morning. Just had a question and further clarification if I could on the gross margin side. With the improvement that came through, you have talked about improvement and rebates, but I was wondering if you can recap if possible what came from, just positive pricing versus mix versus improvements in lowered costs.
Jim O'Leary - EVP and CFO
I gave you absolute numbers for the year and for prior years on the rebates. I told you scale and order of magnitude on what we think related to direct cost savings and I'm reluctant to give you what I think is pure price because particularly in our case it varies so much by market. To say it is pure price and it is just the market and not things we are doing, it's not something I want you to take away from that because if you look at what we are doing in a number of places, pricing up and a lot of average sales price increase is moving away from entry level and it's a different product. You can go through on the 10-Q comes out, you will see what is the average price per market is and if you back out the numbers I gave you, the rest is price.
I don't think it's price purely in the market. A lot of it is price. Things we are doing to diversify move up the value chain and sell more options. We sell more options every quarter than we did the prior quarter, which are 40% plus growth margins. So a lot of what you see is in price "the market." It is price, including things we are doing to diversify the product line and to sell more to every prospect at those diversified product lines. For example, you are not going to sell a lot of options to entry-level people, who you just want to get to the finish line. That is why we are trying to sell, first time move up, second time move up and in some cases style buyers as Ian pointed because the option revenues there are considerably higher and at considerably higher gross margin.
Michael Rehaut - Analyst
Did you say what your options as a percent of revenue was this quarter versus a year ago?
Jim O'Leary - EVP and CFO
I did not Michael, but we will get that for you. I want to say it's about 8%.
Michael Rehaut - Analyst
About 8%? Do you know what it was roughly for fiscal '04?
Jim O'Leary - EVP and CFO
Probably less than 8%. We'll get that for you.
Michael Rehaut - Analyst
Okay. Just going forward, I know you talked about maybe having for the full year operating margins up about 50 basis points, but obviously that would --
Jim O'Leary - EVP and CFO
That is the most variable number. And again, I think Kim just asked a really good question on what happens if the Midwest comes on. You will get the statistic out of our 10-Q. We have roughly a quarter to a third of our subdivisions in the Midwest and Charlotte, which are high volume, lower price point communities. If those come on as they have been in the past as we want them to in the next two or two, not one single number we gave on margin would not be accurate and we will all be ecstatic.
Michael Rehaut - Analyst
Okay, like you said at this point, Midwest and Charlotte is lagging your expectations?
Jim O'Leary - EVP and CFO
Absolutely, but in the case of the Midwest, we are taking every action we can so that its either there or it is not in probably February or March. If it's not, we obviously have to take a hard look at our investment and what is going on there. But we are positioned, we have done everything we could and it's really a question of the economy, job growth and all the things that are driving positively, the markets we're outperforming our mix of Midwest business, is causing us to lag a bit, but it is primarily on the unit side.
I want to point out that we haven't had average price decreases there and over the long-term, but the long- term is probably a few years as we get away from the entry level price point exclusively and diversify ourselves around what we would call the value and style price points. You will see that go up.
But Michael, unfortunately, you know that better than we do or better than I do certainly. It takes a while to turn around a battleship and you only have two or three months sales window to do that, but I think we have done everything that could be done to benefit from the market if it's there.
Michael Rehaut - Analyst
Is current guidance based on the Midwest and Charlotte staying where it is or where it was in the first quarter or a little bit better than where what it has been?
Jim O'Leary - EVP and CFO
It assumed. We are not changing our original guidance and that original guidance assumed considerably better results out of the Midwest than we have seen. We still expect those results to be there. But offsetting that, and the reason we had such a great quarter, the Midwest was not there and we expect it to be there in the next two or three quarters, but we also didn't expect the average prices to go up to the extend they have in the couple of other markets, we didn't expect the level of outperformance we've in Southern California to be there. So, you know, on one hand to take us and on the other hand to give us.
Michael Rehaut - Analyst
Right. I mean considering that the order ASPs are up 19% this quarter - and that's 15% the prior quarter. Would it be reasonable to assume that your ASPs should continue this trend of double-digit growth?
Jim O'Leary - EVP and CFO
I think it would be insane to. We don't when we accept land deals and we don't when we forecast, we don't when we give you guys guidance. I came from industries where if you have came away from Ford (ph) with a 6% price decrease, you were high fiving yourself. Is it sustainable? You should ask the economist serving your firm if you think it's sustainable. We don't forecast that that in our models.
Michael Rehaut - Analyst
Right, your order ASP is up 19% for the quarter.
Ian McCarthy - CEO
The point Michael is it is not just price increase there, it has a lot to do with mix. The point we were making is as Jim just said, Southern California was very strong and continues to be very strong, much higher price point for us than across the country. The Mid-Atlantic, sales up 60% in this quarter. Obviously, we are very focused on looking at the Midwest and looking at Charlotte where we are certainly under-performing at this time, but at the same time, that is the reason we have geographic balance within the company, we can take the market like mid-Atlantic and be up 60% in this quarter and that's really driving the average sales price. There is no driving it through price increases per se in the market.
There are some, but it's driving it because the average price in the mid-Atlantic region is so much higher than the company average. So, you need to look at that and not expect us to necessarily continue to drive 19%, 20% average sales price increases. The point Jim is making is what we are all focused on is a strong Beazer economy across the country, but fairly well sustained, but a much stronger Midwest and Charlotte where we are very focused, we are under-performing in those markets and if we bring those markets up, as we want to do, our average price will have to come down because the average price in this market is so much lower. To use Jim's words, we will be ecstatic if that happens.
So, it's down average price, but reflecting much better sales orders in the mid-Atlantic. That's the key point here. When you go through backlog by market and press release, if you look at our unit backlog which is up 18% and our dollar backlog which is up 42%. All you needed was a modest shift of units to a Midwest to Charlotte and that changes our dynamics considerably.
Michael Rehaut - Analyst
All right. Thank you.
Ian McCarthy - CEO
Operator, I realize there other builders are starting in this time slot, so I think we probably need just one more question and then we will have to cut it off at that time.
Operator
Thank you, our final question comes from Gabriel Kim of Basswood Partners.
Gabriel Kim - Analyst
Good morning.
Ian McCarthy - CEO
Good morning.
Gabriel Kim - Analyst
I'll hurry up. I just wanted to follow-up on that question about SG&A that was asked earlier. My recollection was that the branding, sort of those nonrecurring branding expenses were sort of pretty much done with, but them, I think Jim, you mentioned that there were some of that still in the quarter. Can you tell me how much that worked out to in the quarter?
Ian McCarthy - CEO
I think what we said in Jim's reply to that first pervious question was that really the overhead, the SG&A being up this quarter reflects more our slightly reduced top line growth than we expected. Branding is really not a major contribution here other than some training initiatives, which are rolling over, which rolled over from September. We have a lot of employees, we have some new employees. Part of this whole concept of branding is, everyone has to be trained. And so there is some training expense in that quarter. In fact, the training is associated with the branding is substantially completed.
What we will have to do now is only train new employees. The only real branding and cost in that quarter was due to training. What we have done now is we have made the major changes, which were central overhead. We have pushed all the branding down into each of our markets and their budgeting, their marketing expenses will pick up representing the brand. It was the change that we had to incur in 2004. So I don't think we should worry too much about branding being an effect on SG&A. SG&A being slightly higher in this quarter was really more a reflection of the top line than anything else.
Gabriel Kim - Analyst
Okay, over sort of on the SG&A and your mortgage origination business, if I look at your SG&A percentage related to mortgages over revenue. This is sort of the first time it's actually been over 100%. Is there something quirky going on in the first quarter or is this something I should expect to see going forward?
Ian McCarthy - CEO
Obviously the revenue in our mortgage business is slightly down as well. Our capture rate which is up in the 70's is down in the 60's now. Lot of that reflects the much tougher environment out there, obviously in the mortgage market, the refinances are not coming through now so the whole mortgage market has become more competitive. Good actually for our customers because there is competitive rates out there, but in terms of what we are able to do, the number of buyers that we can capture inside these and mortgages drawn (ph) down and I think that's pushed the SG&A up a little bit again, probably a top line effect affecting the SG&A.
Jim O'Leary - EVP and CFO
It's only 400 grand (ph) and you've got mortgage people in every branch and you've got some certain fixed costs to staff buyer to come in, that doesn't change much. That's 400 grand is probably a little bit variable and raises the new people.
Gabriel Kim - Analyst
Okay. Last question is just on the operating margin and guidance, you said that with the -- I think this was Margaret's question. On the operating margin, there was 50 basis points of upside and that was premised on the Midwest covering, is that correct?
Jim O'Leary - EVP and CFO
Yes. Our original guidance contemplated much stronger, as by the way it still does, much stronger results in the Midwest. We really didn't factor,, as we just talked about with Michael, the price increases and mix shift we had. If the Midwest recovers and Charlotte as well, you have a higher unit count and much lower price point ASP and gross margin, but I think that's probably a better question to go on to a lot of detail on in the next quarter. If you will be -- into the year, we will see what this going season and as we said we will be ecstatic if ASP is much lower that and higher units, and actually profit out of these markets.
Gabriel Kim - Analyst
So, in that scenario though I should expect to see gross margins slightly lower, but for offsetting units will give the 50 basis points?
Jim O'Leary - EVP and CFO
That's right. This is counter intuitive, but we would be ecstatic if 278 was not the average price in our backlog was considerably lower. In the Midwest, our ASP is 150. Dramatically different than the West.
Gabriel Kim - Analyst
Thank you.
Ian McCarthy - CEO
Thanks very much. We have discussed a lost issues today and obviously Jim and I still here today. We would be pleased to follow-up with anyone if anyone would like to call in. We would just like to thank everyone for joining us today. As we said previously, there will be a recording of this conference call with the slide presentation and it will be on the investor realization section of our web site Beazer.com. this afternoon.
So I apologize for my calls, but I hope that we answered all of your questions. Again, Jim and I will be available today to answer any further questions or any follow-up questions you have.
Thank you and we look forward to talking to you in the future. Thank you.
Operator
Thank you for joining. That does conclude today's call. You may disconnect at this time.